Using Data to Make Smart SKU Decisions

In Part 1, we explored how adding or removing a product SKU can impact your bottom line – affecting everything from inventory costs and fulfilment efficiency to customer experience and marketing strategy. But how do you ensure you’re making the right decision?

The answer is data.

Rather than making SKU decisions based purely on instinct or one-off customer requests, businesses should use real metrics to:

• Validate new product opportunities before launching
• Identify underperforming SKUs that should be discontinued
• Avoid tying up cash flow in inventory that doesn’t sell
• Optimise the product mix for profitability and efficiency

Step 1: Tracking the Right Data for SKU Decisions

Before Adding a New SKU, Ask:

• Is there existing demand? Check customer reviews, survey feedback, and competitor offerings.
• What is the projected profit margin? Calculate cost per unit, selling price, and expected demand.
• Can current fulfilment processes handle it? Evaluate storage space, shipping, and supplier reliability.
• Will it impact other products? Avoid cannibalisation – i.e. you may not want to launch a new product that takes sales away from a more profitable SKU.

Key Metrics to Track Before Launching a New SKU:

Before Removing a SKU, Ask:

• Is the product consistently underperforming? Compare sales trends over time. CloudFO can show and explain the seasonality impact on your sales.
• Does it have a high return or complaint rate? Look at the refund and customer support data. Refunds are automatically tracked in CloudFO when you connect your commerce stores – Amazon, Shopify and Stripe.
• Is it tying up too much inventory costs? Evaluate inventory turnover and holding costs.
• Would its removal negatively impact customer loyalty? Are customers emotionally attached to it? What are they saying about this product online and in reviews?
• Is there a particular sales channel where it underperforms? Some products may sell well on one platform but not another. CloudFO can help compare SKU sales performance across multiple sales channels.

Key Metrics to Track Before Removing an SKU:

By tracking these numbers, you can make SKU decisions with confidence, rather than guessing what might work.

Step 2: Testing a New SKU Before a Full Launch

Instead of jumping into full production, consider testing the SKU first to reduce risk.

Ways to Validate a New Product Before Scaling:

• Limited Pre-Orders: Gauge demand before production by allowing customers to reserve the product.
• Small-Batch Release: Order a small quantity and monitor sales performance before committing to a larger stock order.
• A/B Testing on Your Website: List the product online and track clicks, add-to-cart rates, and conversion rates before investing in inventory.
• Run a Waitlist or Survey: See how many people express interest before committing.

Pro Tip: Check how the new SKU affects your average order value (AOV) – if customers buy more overall with the new product, it may be a strong addition. Average order value is automatically tracked in CloudFO – ask CloudFO to forecast how it could change if you add this new product.

Step 3: Knowing When to Cut a Product

Discontinuing a product SKU isn’t just about slow sales – it’s about overall business health. Even products that sell decently can be hurting your profitability if they’re too costly to store, return rates are high, or they require disproportionate marketing spend.

Signs It’s Time to Remove a SKU:

• Low Profit Margins – Even if sales are decent, a product that barely breaks even is a drain on resources.
• High Storage & Fulfilment Costs – If a SKU requires specialised storage, oversized shipping, or extra labour, it may not be worth keeping.
• Rising Return or Complaint Rates – A product that generates too many customer issues, refunds, or bad reviews can damage your brand.
• Low Sales Volume Over Time – If a product’s sales are declining despite promotions and optimisations, it’s likely past its prime.

How to Measure If a Product Should Be Discontinued:

• Check units sold per month vs. storage & marketing costs
• Compare return rates vs. your best-performing products
• Look at how much capital is tied up in slow-moving stock

By removing underperforming SKUs, businesses can reduce costs, improve efficiency, and free up cash flow for better opportunities. Check if you have an emotional attachment to this product that is impacting your decision-making?

Final Thoughts: Smart SKU Management = Higher Profitability

Making SKU decisions based on data and not emotions ensures you’re growing your product range in a way that’s sustainable, profitable, and aligned with customer demand.

Key Takeaways:

• Before adding a product, test demand through pre-orders, small-batch releases, or surveys.
• Track costs, return rates, and margins to decide when to remove a product.
• Use sales data to focus marketing on your best-performing SKUs.
• Reducing unnecessary SKUs can lower storage costs and improve operational efficiency.

Tracking SKU sales, costs, and returns can help you identify which products to grow and which to cut. Tools like CloudFO automatically categorise these metrics, making it easier to see what’s working and what’s hurting your bottom line.